Please note the information below is intended to provide generalized information that is appropriate in certain situations.  It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.  The contents of the information provided below should not be acted upon without specific professional guidance.  Please call us if you have any questions.

In our always-connected, always-on business environment, it isn’t unusual for employees to work from home on a regular basis. For the majority of individuals, this work occurs in the evenings, or on weekends or holidays, when they’re not otherwise expected to be in the office. However, for an increasing number of employees, they’re telecommuting all or almost all of the time. When they do show up in the office, it is frequently just for group meeting or other gatherings, not to put in a “regular” day’s work sitting in an office, cubicle, or other workspace.

It is employees in this later situation who may be interested in a recent Tax Court decision involving a telecommuting employee with large home office deductions. However, before we get to this case, let’s quickly review the general requirements for a deduction.

The rules allowing a home office deduction if you’re self-employed generally require that the space be used regularly and exclusively—

• as a principal place of business,
• as a place to meet or deal with clients and customers in the normal course of business, or
• “in connection with” the business if the space is a separate structure from the residence (e.g., a barn or detached garage).

When you’re an employee (rather than self-employed), you have to meet one of the above requirements and the so-called employer convenience test. This test is hard to satisfy, unless your employer doesn’t provide you with an appropriate space in which to get your work done. This was the situation in a recent court case.

The case involved an employee hired to work in New York for an employer in the marketing and public relations field whose only offices were in California. The plan was to secure office space in New York, but that never happened and the employee worked out of her apartment, utilizing about a third of its space as a home office. The employer listed the employee’s apartment as its New York office and the phone number listed for that office was the employee’s landline phone. The employee worked out of the home office throughout the year and even saw clients there on a regular basis. Due to the company’s tight financial condition, she was never reimbursed for any of her home office expenses. As a result, she claimed a large home office deduction.

Although the IRS disallowed the entire deduction, the court found that the taxpayer met the “employer convenience test” and sustained a deduction for a third of her rent and cleaning expenses—equal to the third of her studio apartment used as a home office. It did this despite the fact that she technically didn’t meet the “exclusive use” part of the test for claiming the deductions because she occasionally did non-business activities in the home office and had to regularly walk through the space to get to and from the sleeping quarters.

If you are regularly working from home because your employer doesn’t provide you with appropriate space from which to perform your job and you are not currently claiming a home office deduction, we should talk. It could be that you’re entitled to some substantial additional deductions.